Stephen Beer, Blog, Stephen Beer

Stephen Beer (www.stephenbeer.com)

Thursday, November 13, 2008

Osborne does not comprehend full scale of crisis

Osborne does not comprehend full scale of crisis - letter in the Financial Times

Published: November 12 2008 02:00

From Mr Stephen Beer.

Sir, George Osborne should give some more thought to his economic strategy (“How Britain should tackle its recession”, November 10). He may believe he is sounding quite reasonable when he advocates tax cuts that are “properly funded”, presumably by spending cuts elsewhere. Yet he does not give the impression he really understands the scale of the global economic crisis.

We face a severe drop in economic confidence. Relying on Bank of England rate cuts as the principal policy tool risks the economy wallowing in a liquidity trap while unemployment rises. Government action should therefore focus on measures that restore confidence and compensate for the massive deleveraging taking place by households and the financial sector.

The alternatives are to give in to large-scale unemployment or higher inflation in future (which passes the debt to savers). The government will need to step in with targeted tax cuts that it intends to be permanent, together with increased spending. Both should be aimed at boosting employment and investment.

Once these measures have been decided upon, a reorientation of public finances can be devised that will reduce the government deficit when sustained growth resumes. To prevent a 1930s-style Depression, governments need to take bold action now.